Inheritance Tax (IHT) remains a concern for many individuals seeking to preserve family wealth across generations.

These concerns have been amplified by the announcements in the Autumn Budget, which introduced major changes to key IHT reliefs and regimes.  

From April 2026, Agricultural Property Relief (APR) and Business Property Relief (BPR) will be subject to a combined cap of £1 million, with a new reduced rate of 20 per cent applied to qualifying assets above this threshold.  

Additionally, reforms to the IHT treatment of non-domiciled individuals (non-doms) will take effect from April 2025, moving to a residence-based system.  

These changes are expected to affect farmers, family businesses and internationally mobile individuals, increasing the risk of substantial IHT liabilities. 

One often overlooked yet highly effective strategy to mitigate IHT liabilities is writing a life insurance policy in trust.  

What is a trust? 

A trust is a legal arrangement whereby one party (the trustee) holds assets for the benefit of others (the beneficiaries).  

In the context of life insurance, the policyholder arranges for the proceeds of the policy to be paid into the trust upon death, ensuring the payout is outside their taxable estate. 

How does writing a life insurance policy in trust reduce Inheritance Tax? 

Normally, any life insurance policy not written in trust will form part of the deceased’s estate.  

Consequently, the payout could increase the value of the estate and potentially result in a higher IHT liability. 

By writing the policy in trust: 

• The proceeds are excluded from the estate and are therefore not subject to Inheritance Tax. 

• The payout is made directly to the trust, ensuring beneficiaries receive funds swiftly without waiting for probate. 

• It can provide liquidity to cover any IHT due, preventing the need for heirs to sell assets such as property or investments. 

Key benefits of using a trust 

One of the primary advantages is that the value of the life insurance policy is not included when calculating IHT.  

Because the payout bypasses the estate and probate process, beneficiaries typically receive the proceeds more quickly, which is especially useful when there are pressing financial obligations, including the settlement of any IHT liability. 

The trust arrangement allows the policyholder to specify exactly who should benefit and under what circumstances.  

Discretionary trusts offer even greater flexibility, enabling trustees to decide how to distribute the funds based on beneficiaries’ needs. 

Addressing gifts and taper relief 

Life insurance in trust is also useful for covering potential IHT on gifts made within seven years of death.  

A term policy can provide funds to meet any liability, especially where taper relief applies.  

This ensures beneficiaries are not left with an unexpected tax bill if the donor dies within that period. 

Implications for non-domiciled individuals (non-doms) 

The Autumn Budget introduced significant changes to the IHT treatment of non-domiciled individuals.  

From April 2025, long-term UK residents will be subject to IHT on their worldwide assets under a new residence-based system.  

A life insurance policy in trust can help mitigate the risk of beneficiaries facing IHT, particularly for non-doms still UK residents or recently departed. 

APR and BPR relief reforms: the impact on business and farming families 

From April 2026, a £1 million cap will apply to Agricultural Property Relief (APR) and Business Property Relief (BPR), with a reduced 20 per cent IHT rate on assets above the threshold.  

This change could impact farming families and business owners with larger estates.  

A life insurance policy in trust can provide funds to cover the liability, avoiding the need to sell business or farm assets. 

Types of trusts commonly used 

• Bare trusts – Fixed beneficiaries and straightforward structure, often used when certainty is preferred. 

• Discretionary trusts – Trustees have discretion over how and when to distribute funds, offering flexibility but with additional administrative requirements. 

• Flexible trusts – Combine elements of both, allowing a default beneficiary while enabling trustees to alter distributions if circumstances change. 

Important considerations 

While writing a life insurance policy in trust offers several advantages, there are factors to bear in mind: 

• Loss of control – Once the policy is placed in trust, it is legally owned by the trustees. Any changes require their consent. 

• Potential periodic and exit charges – Discretionary trusts may be subject to the relevant property regime, although life insurance policies typically have no value during the policyholder’s lifetime, making such charges negligible. 

• Professional advice essential – Ensuring the correct trust structure is chosen and drafted correctly is a must. Missteps may lead to IHT exposure or unintended consequences. 

If you are concerned about IHT and keen to preserve wealth for future generations, writing a life insurance policy in trust can be a simple yet powerful planning tool.  

If you would like to explore how this strategy could fit into your estate planning, our expert tax advisers are on hand to guide you.  

Contact us today to discuss solutions for you and your family.